NEW BIR REGULATIONS ON ESTATE TAX

By Elner A. Reyes, SGV & Co. THE BUREAU of Internal Revenue has recently issued Revenue Regulations (RR) No. 2-2003 which clarify various issues pertaining to the application of the appropriate tax rates, manner of claiming deductions from gross estate of the deceased and the procedures for filing the estate tax return and payment of due taxes. Welcome change. Undeniably, the most welcome change brought about by Republic Act No. 8424 is the lowering of the graduated tax rates from the maximum limit of 35% to 20% for net assets over P10 million. RA 8424 otherwise known as the The Tax Reform Act of 1997 took effect on January 1, 1998 and it amended the higher tax rates prescribed by RA 7499. RR 2-2003 establishes the law which governs estate taxes. It is a well-settled rule that estate tax is governed by the law in force at the time of death of the deceased. With this rule, the reduced tax rates and procedures prescribed in RR 2-2003 will apply to estate taxes falling due after the effectivity of RA 8424 or beginning January 1, 1998. To illustrate, Mr. X died sometime in 1999. The reduced tax rates will apply in the computation of the estate tax since RA 8424 was already in effect at the time of his death. Supposing, however, that Mr. X died on December 31, 1997 and the settlement of his estate will necessarily take place after the effectivity of RA 8424. Will the reduced tax rates under RA 8424 be applicable? The answer is no. While it is true that the estate tax will be paid after RA 8424 has amended or repealed RA 7499, the rules under the latter will still govern the computation of the due estate taxes. It must be noted that estate tax accrues upon the death of the decedent and the accrual of the tax is different from the obligation to pay the tax (Lorenzo vs. Posadas, 64 Phil. 353). Gross estate. RR 2-2003 further provides the rules on the composition of the gross estate as well as the computation of the net estate and due estate taxes. The rules on what properties should be included in the gross estate depend on the Tax Code classification of the deceased. For resident aliens and citizens of the Philippines, the gross estate shall include all properties, real or personal, tangible or intangible, whether in the Philippines of abroad. Likewise included in the composition of the gross estate are revocable transfers and transfers for insufficient consideration. Fair Market Value. As to the proper valuation of the gross estate, the new regulations require that the properties must be valued based on the fair market value at the time of death. In case the property is a real property, the fair market value shall either be the fair market value (zonal 1

value) as determined by the commissioner of internal revenue or the fair market value as shown in the schedule of values fixed by the assessors office, whichever is higher. In case of share of stock, the fair market value shall depend on whether the shares are listed or unlisted in the stock exchange. According to the regulations, unlisted common shares shall be valued based on their book value while unlisted preferred shares are valued based on par value. Allowed deductions. To compute the net estate of the deceased, there are certain items that can be deducted from the value of the gross estate. If the deceased is a citizen or resident alien, the following items are deductible: (1) expenses, losses, indebtedness and taxes; (2) property previously taxed; (3) transfer for public use; (4) family home; (5) standard deduction, (6) medical expenses; (7) retirement benefits of the decedent under RA 4917 and (8) net share of the surviving spouse on the conjugal partnership property. It must be emphasized that the standard deduction of the P1 million, medical expenses incurred by the decedent and retirement benefits received under RA 4817 are new deductions allowed by RA 8424 to reduce the value of the estate that will be subject to tax. Ordinary deductions falling under the category of t expenses, losses, indebtedness and taxes may be further classified into: (a) funeral expenses, (b) judicial expenses, (c) claims against insolvent persons and (e) unpaid mortgages, taxes and casualty losses. The new regulations impose either additional restrictions or conditions before these items can be deducted. Funeral expenses. With regard to funeral expenses, the new regulations provide that the deduction from the gross estate shall be limited to the actual funeral expenses incurred (whether paid or unpaid) up to the time of internment or an amount equal to 5% of the gross estate, whichever is lower but not to exceed P200,000. Funeral expenses above the P200,000 threshold shall no longer be allowed as deduction. The regulations also state that the unpaid portion of the funeral expenses above the P200,000 threshold cannot be claimed as additional deduction under the category Claims against the estate. Expenses allowed under the category of judicial expenses are those incurred in the inventory taking of assets comprising the gross estate, administration of the properties, payment of debts of the estate and the distribution of the estate among the heirs. In short, these deductible items are expenses incurred during the settlement of the estate but shall not go beyond the last day prescribed by law for filing of the estate tax return.

Unlike funeral expenses, the new regulations do not provide for any limit or threshold on these expenses as long as they are duly supported by documents showing how they were actually incurred. Another source of deductions is claims against the estate. While there is also no limit to deductions under this category, the regulations prescribe conditions such as: (1) The claim must represent a personal obligation of the deceased existing at the time of his death except unpaid obligations incurred upon his death such as unpaid funeral expenses and unpaid medical expenses which are classified under a different category of deductions; (2) The claim must be contracted in good faith and for adequate and full consideration in money or moneys worth; (3) The claim must be a debt or claim which is valid in law and enforceable in court; (4) The indebtedness must not have been condoned by the creditor or the action to collect from the deceased must not have prescribed; and,(5) Submission of various supporting documents as specified under the regulations, depending upon the nature of the obligations, whether be it a simple loan or arising from the purchase of goods or services. Unpaid mortages. Under the category of unpaid mortgages, it is required that the full value of the mortgaged properties shall be included in the value of the gross estate. In case of unpaid mortgage payable where the beneficiary of the loan proceeds is another person, the regulations provide that the value of the unpaid loan must be included as a receivable of the estate. In case there is any legal impediment to recognizing it as a receivable of the estate, the unpaid obligation/mortgage payable shall not be allowed as a deduction from the gross estate. However, it must be noted that the new regulations expanded the definition of an unmarried head of the family, which now includes a legally separated man or woman, for the purpose of establishing a family home. As discussed earlier, on e of the important features introduced by RA 8424 is the inclusion of the standard deduction equivalent to P1 million as one of the items that can be deducted from the gross estate of the deceased. Being a standard deduction, the regulations do not require the submission of any supporting documents. Another change introduced by RA 8424 is the inclusion of the medical expenses incurred by the decedent as part of additional deduction. Under this category, all medical expenses, i.e. cost of medicines, hospital bills, doctors fees, etc., incurred within one year before the decedents death shall be allowed as a deduction provided that the expenses do not exceed P500,000 and such expenses are duly substantiated with supporting documents.

The regulations clarify that any unpaid amount in excess of the P500,000 threshold cannot be claimed as additional deduction falling under category of claims against the estate. As to the last item of deduction under gross estate of resident alien and citizen of the Philippines, the regulations provide that any benefit received by the heirs from the deceaseds employer under RA 4917 can be allowed as additional deduction as long as the amount is included as part of the gross estate of the deceased. It is also worth noting that a dependent of a deceased non-resident alien cannot avail himself of the standard deduction of P1 million given to resident aliens and citizens of the Philippines. More over, it is required that the current value of the deceaseds gross estate located outside the Philippines must be reported in the estate tax return before these can be claimed as deductions from the gross estate. When to file. The new regulations further clarify various concerns regarding the time and place of filing the required estate tax return as well as the payment of taxes. As a rule, the estate tax return shall be filed within six months from the time of death. In meritorious cases, the BIR commissioner or any of his authorized revenue officers may extend the deadline for another 30 days. The new regulations lay down the rules on the place of filing of the estate tax return depending upon the Tax Code classification of the deceased. With regard to the time of payment of estate tax , the prevailing rule is that the tax must be paid upon filing of the return. Likewise, in meritorious cases, the BIR commissioner or any of his authorized revenue officers may extend the deadline but for not more than five years incase the estate is settled through the courts, or two years in case the estate is settled extra judicially. Finally, the new regulations also allow the payment of the estate tax by installment. <New BIR regulations on estate taxes, Elner A. Reyes, SGV & Co., Philippine Daily Inquirer, Business, Friday March 21, 2003>